Chapter 8 Profit Planning Profit planning steps taken by businesses to achieve their planned levels of profits accomplished by preparing a number of budgets that together form an integrated business plan known as the master budget Master budget essential management tool that communicates management s plans throughout the organization allocates resources and coordinates activities The Basic Framework of Budgeting Budget is a detailed plan to the future that is usually expressed in formal Planning involves developing goals and preparing various budgets to quantitative terms achieve these goals Control involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change Advantages of budgeting organization o Budgets communicate management s plans throughout the o Budgets force managers to think about and plan for the future o The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively o The budgeting process can uncover potential bottlenecks before they occur o Budgets coordinate the activities of an entire organization by integrating the plans of its various parts o Budgets define goals and objectives that can serve as benchmarks Responsibility accounting a manager should be held responsible for those items that the manager can actually control to a significant extent point is to make sure nothing falls through the cracks that the organization reacts quickly and appropriately to deviations from its plans and that the organization learns form the feedback Continuous or perpetual budget is a 12 month budget that rolls forward one month as the current month is completed keeps managers focused at least one year ahead so that they do not become too narrowly focused on short term results In the most successful budget programs managers actively participate in preparing their own budgets Self imposed or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels o Advantages Individuals at all levels are recognized as members of the team whose views and judgments are valued by top management Budget estimates prepared by front line managers are more accurate and reliable Motivation is higher when individuals participate in setting their own goals than when the goals are imposed from above create commitment A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet o Limitation lower level managers may allow too much budgetary slack since they will be held accountable for actual results However most companies operate as follows o Top managers initiate the budgeting process by issuing profit targets o Lower level managers are directed to prepare budgets that meet those targets If a budget program is to be successful o It must have the complete acceptance and support of the people who occupy key management positions o Top management should not use the budget to pressure or blame employees o Top managers cannot become preoccupied with technical aspects Highly achievable budgets may be challenging but can almost always be met by competent managers exerting reasonable effort help build a manager s confidence and generate greater commitment to the budget result in less undesirable behavior at the end of budgetary periods Budget committee responsible for overall policy relating to the budget program and for coordinating the preparation of the budget itself Master budget consists of a number of separate but interdependent budgets that formally lay out the company s sales production and financial goals culminates in a cash budget a budgeted income statement and a budgeted balance sheet o Sales budget first step in the budgeting process detailed schedule showing the expected sales for the budget period all other parts depend on the sales budget o Production budget is prepared after the sales budget because the sales budget helps determine how many units need to be produced o Production budget is used to determine the direct materials budget the direct labor budget and the manufacturing overhead budget o Cash budget is a detailed plan showing how cash resources will be acquired and used sales budget selling and administrative expense budget production budget direct materials direct labor manufacturing overhead budget are all used to determine the cash budget o Last budgeted income statement and budgeted balance sheet prepared Preparing the Master Budget Sales budget o Budgeted unit sales selling price o Schedule of expected cash collections Production budget o Production budget lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory o Budgeted unit sales desired ending inventory of finished goods total needs beginning inventory of finished goods required production o Ending inventory of finished goods for the total year is the ending inventory of the last quarter NOT the sum of all quarters o Beginning inventory of finished goods for the total year is the beginning inventory for the first quarter NOT the sum of all the quarters o If we had a merchandising company instead of a manufacturing company we would prepare a merchandise purchases budget Budgeted cost of goods sold desired ending merchandise inventory total needs beginning merchandise inventory required purchases Direct materials budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories o Required production in units of finished goods raw materials required per unit of finished goods raw materials needed to meet production schedule desired ending raw materials inventory total raw materials needed beginning raw materials inventory raw materials to be purchased cost of raw materials per pound cost of raw materials to be purchased o Schedule of expected cash disbursements for raw materials needed to prepare the overall cash budget Direct labor budget shows the direct labor hours required to satisfy the production budget o Required production in cases direct labor hours per case total direct labor hours needed direct labor cost per hour total direct labor cost Manufacturing overhead budget lists all costs of production other than direct materials and direct labor o Budgeted direct labor hours variable manufacturing overhead rate variable
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